EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

Using Underlying Building Characteristics to Pay for Roof Improvements

Property owners with large roofs particularly in the warehouse,
industrial and self storage area have a unique
opportunity to obtain large tax incentives for major roof improvements and roof
repairs. For many existing buildings roofs are the most expensive items
requiring end of life cycle replacement. This article explains how to use the
commercial building Section 179D tax incentive and energy efficient lighting to
plan into a large roof tax incentive.

The EPAct Tax Opportunity

If the building project doesn't qualify for the maximum $1.80 per square
foot immediate tax deduction, there are tax deductions of up to 60 cents per
square foot for each of the three major building subsystems: lighting, HVAC and
the building envelope. The building envelope is every item on the
building’s exterior perimeter that touches the outside world including
roof, walls, insulation, doors, windows and foundation.

Understanding the Lighting Tax Calculation that drives the $1.80 per square
ft.

Warehouses that combine energy efficient lighting and heating have become by
far the largest category of buildings qualifying for the $1.20 to $1.80 EPAct
tax deductions. Most warehouses, industrial and self storage buildings are non
conditioned meaning they are not air conditioned1.

Many existing warehouses, manufacturing facilities and self storage
facilities have prior generation metal halide and or T-12 lighting, that is now
federally banned, and needs to be replaced.

In non conditioned buildings lighting is by far the biggest building energy
user. Section 179D requires a 50% overall building energy cost reduction and
energy efficient lighting can achieve 42% and greater energy cost reduction
alone. The remaining difference to achieve the 50% cost reduction can usually
be achieved by a reasonably energy efficient heater.

Roof Tax Planning

Commercial Roof replacement is very expensive and can cost upwards of $4.00
per square ft. This means that with buildings 250,000 square ft and above roof
replacement can easily exceed $1,000,000. The ability to take a large portion
of roof capital outlay and convert it from a 39 year asset to an immediate tax
deduction has tremendous economic value. Roofs require replacement when they
are worn and often need to be replaced or improved in preparation for solar.

Tax Planning Examples

EPAct Qualifying 100,000 sq ft Warehouse Example:

If light power density is reduced to .45 watts/sq ft or less then the above
example would achieve a $1.80/sq ft EPAct Tax Deduction in addition to the
estimated rebates listed. At 100,000 sq ft, in this example having achieved
maximum tax deduction the warehouse would receive a $180,000 EPAct tax
deduction, worth $63,000 in federal tax saved, using a 35% federal tax rate.

250,000 sq ft heated only Manufacturing Facility Example:

The lighting targets for manufacturing to achieve both lighting only and
modeled tax deductions under EPAct are even easier to achieve in this building
category than they are in a pure pick and pack warehouse. The targets
represented below if achieved could generate a $450,000 EPAct Tax deduction.

Most times the project costs associated with achieving the wattage targets
above and installing or replacing unit heaters, costs around $1/sq ft. In the
case of the above Manufacturing facility if it were able to reduce its lighting
watts/sq ft to .82, then the facility would fully qualify for $1.80/sq ft.
Achieving the $1.80/sq foot would leave $0.80/sq ft or $200,000, in EPAct tax
deduction, left over to apply to an envelope improvement, in this case a roof
enhancement or replacement.

Self-Storage EPAct Portfolio Example:

The above chart indicates the strategy related to this tax deduction with
regards to a portfolio. We have used the example of self storage as they are
usually chains and have multiple locations. In this example there are 10 total
facilities 5 of which need lighting retrofits and the other 5 which need
lighting retrofits and roofs. The strategy in this case is to take advantage of
the projects in which all of the deduction can be utilized. EPAct limits
deductions to the lesser of the amount qualified for (by achieving certain
energy benchmarks) or project cost, so the best projects have a high enough
project cost to fully realize the deduction qualified for. In this case when
retrofitting lighting in a heated only space, like these self-storage
facilities, the project cost associated with only a lighting retrofit is likely
only $0.80/sq ft, which leaves $1.00/sq ft left over. Lighting and the fact
that the space is heated only, qualifies the space for $1.80, an additional
spend on the envelope, raises the project cost above the $1.80 for which it has
already qualified. This "left-over" $1/sq ft should be used to reduce the cost
of the roof replacement/improvement.

Conclusion

The total project should take advantage of energy savings, rebates and tax
savings to leverage all incentives. Knowing the EPAct targets ahead of time and
making sure the internal systems qualify is important to achieve an EPAct Tax
deduction. Planning ahead to take advantage of the largest tax deductions by
reviewing portfolio needs is the best way to utilize EPAct to the fullest
extent. Understanding all of these concepts and using them systematically will
allow companies to take advantage of their underlying building systems to
upgrade or replace roofs, a project with substantially higher costs than other
building improvements.